Options Supervisor’s Course (OPSC) 41

The investor sells a put option with a strike price of $48 and receives a premium of $2 per share. Therefore, the total premium received for selling the put option is: $$ \text{Total Premium} = 100 \text{ shares} \times 2 \text{ dollars/share} = 200 \text{ dollars} $$ At expiration, if the stock price falls to $45, the put option will be exercised by the buyer, obligating the investor to purchase an additional 100 shares at the strike price of $48. The cost to buy these shares is: $$ \text{Cost to Buy} = 100 \text{ shares} \times 48 \text{ dollars/share} = 4800 \text{ dollars} $$ However, the investor already owns 100 shares, which they can sell at the current market price of $45. The total revenue from selling these shares is: $$ \text{Revenue from Sale} = 100 \text{ shares} \times 45 \text{ dollars/share} = 4500 \text{ dollars} $$ Now, we can calculate the total profit or loss from this strategy. The total cash flow from the put sale and the stock transaction is: $$ \text{Total Cash Flow} = \text{Total Premium} + \text{Revenue from Sale} – \text{Cost to Buy} $$ Substituting the values we calculated: $$ \text{Total Cash Flow} = 200 \text{ dollars} + 4500 \text{ dollars} – 4800 \text{ dollars} = -100 \text{ dollars} $$ This indicates a loss of $100. However, since the investor received the premium, the net loss from the entire strategy is: $$ \text{Net Loss} = \text{Total Cash Flow} = -100 \text{ dollars} $$ Thus, the investor’s total profit or loss from this covered put sale strategy, considering the premium received and the obligation to buy the stock at the strike price, results in a loss of $100. This scenario illustrates the risks associated with a covered put sale strategy, particularly in a declining market. According to the Canadian Securities Administrators (CSA) guidelines, investors must be aware of the implications of their strategies, including the potential for losses when the market moves against their positions. Understanding these dynamics is crucial for effective risk management in options trading.

$$ \text{Total Stock Value} = 10 \text{ contracts} \times 100 \text{ shares/contract} \times 50 \text{ dollars/share} = 50,000 \text{ dollars} $$ Next, we calculate the premium received from selling the covered calls. The client sold 10 call contracts at a premium of $2 each, which gives us: $$ \text{Total Premium} = 10 \text{ contracts} \times 100 \text{ shares/contract} \times 2 \text{ dollars/share} = 2,000 \text{ dollars} $$ According to the OCC rules, the margin requirement is 20% of the total stock value plus the premium received. Therefore, we calculate the margin requirement as follows: $$ \text{Margin Requirement} = 0.20 \times 50,000 \text{ dollars} + 2,000 \text{ dollars} = 10,000 \text{ dollars} + 2,000 \text{ dollars} = 12,000 \text{ dollars} $$ However, since the question asks for the minimum margin requirement for the covered call strategy specifically, we need to consider that the margin requirement for a covered call is typically lower than that for a naked call. The OCC allows for a reduced margin requirement for covered calls, which is often calculated as the lesser of the above calculation or the intrinsic value of the calls sold. In this case, since the calls are out-of-the-money (strike price $55 vs. stock price $50), the intrinsic value is $0, and thus the margin requirement is primarily based on the stock value. Therefore, the minimum margin requirement for this position is $1,000, which is 20% of the underlying stock value of $50,000. This understanding is crucial for options supervisors, as it highlights the importance of accurately calculating margin requirements based on the specific strategies employed by clients, in accordance with the guidelines set forth by the Canadian Securities Administrators (CSA) and the OCC. Understanding these nuances helps ensure compliance with regulatory standards and protects both the client and the firm from undue risk.

In this scenario, the firm must first verify that the client meets the minimum financial thresholds established in their internal policy, which the client does, as they have a net worth of $5 million and an annual income of $500,000. However, the firm must also conduct a comprehensive suitability assessment, which includes evaluating the client’s understanding of the risks associated with options trading. This is crucial because options can involve complex strategies that may lead to significant losses, potentially exceeding the initial investment. The correct action is to approve the account after conducting a thorough suitability assessment and ensuring the client understands the risks involved (option a). This approach not only complies with the internal policies of the firm but also adheres to the regulatory requirements that mandate firms to act in the best interest of their clients. Options b, c, and d present various shortcomings. Option b fails to consider the necessity of a suitability assessment, which is a critical component of the account approval process. Option c incorrectly assumes that a moderate risk tolerance is incompatible with options trading, which is not necessarily true, as many strategies can be tailored to fit a moderate risk profile. Lastly, option d, while it suggests a cautious approach, does not fulfill the requirement of ensuring the client fully understands the risks before approval. Thus, the firm must prioritize a comprehensive assessment to ensure compliance with both regulatory standards and internal policies.

In this scenario, the firm must first verify that the client meets the minimum financial thresholds established in their internal policy, which the client does, as they have a net worth of $5 million and an annual income of $500,000. However, the firm must also conduct a comprehensive suitability assessment, which includes evaluating the client’s understanding of the risks associated with options trading. This is crucial because options can involve complex strategies that may lead to significant losses, potentially exceeding the initial investment. The correct action is to approve the account after conducting a thorough suitability assessment and ensuring the client understands the risks involved (option a). This approach not only complies with the internal policies of the firm but also adheres to the regulatory requirements that mandate firms to act in the best interest of their clients. Options b, c, and d present various shortcomings. Option b fails to consider the necessity of a suitability assessment, which is a critical component of the account approval process. Option c incorrectly assumes that a moderate risk tolerance is incompatible with options trading, which is not necessarily true, as many strategies can be tailored to fit a moderate risk profile. Lastly, option d, while it suggests a cautious approach, does not fulfill the requirement of ensuring the client fully understands the risks before approval. Thus, the firm must prioritize a comprehensive assessment to ensure compliance with both regulatory standards and internal policies.

In this scenario, the firm must first verify that the client meets the minimum financial thresholds established in their internal policy, which the client does, as they have a net worth of $5 million and an annual income of $500,000. However, the firm must also conduct a comprehensive suitability assessment, which includes evaluating the client’s understanding of the risks associated with options trading. This is crucial because options can involve complex strategies that may lead to significant losses, potentially exceeding the initial investment. The correct action is to approve the account after conducting a thorough suitability assessment and ensuring the client understands the risks involved (option a). This approach not only complies with the internal policies of the firm but also adheres to the regulatory requirements that mandate firms to act in the best interest of their clients. Options b, c, and d present various shortcomings. Option b fails to consider the necessity of a suitability assessment, which is a critical component of the account approval process. Option c incorrectly assumes that a moderate risk tolerance is incompatible with options trading, which is not necessarily true, as many strategies can be tailored to fit a moderate risk profile. Lastly, option d, while it suggests a cautious approach, does not fulfill the requirement of ensuring the client fully understands the risks before approval. Thus, the firm must prioritize a comprehensive assessment to ensure compliance with both regulatory standards and internal policies.

The recommended portfolio of 60% equities and 40% fixed income may not align with his moderate risk tolerance, especially considering the potential for market volatility and the need for income stability in retirement. The firm must ensure that the investment strategy is suitable for Mr. Smith’s specific circumstances, which includes evaluating the potential impact of market fluctuations on his income needs. Furthermore, the firm should consider the implications of the suitability assessment as outlined in the CSA’s guidelines, which emphasize the importance of a holistic view of the client’s financial situation. This includes not only the historical performance of the recommended investments but also the current economic environment and Mr. Smith’s personal financial goals. In summary, the correct answer is (a) because it encapsulates the firm’s obligation to align the investment recommendation with Mr. Smith’s risk tolerance and income needs, ensuring compliance with the regulatory framework designed to protect investors.

When the stock price rises to $120, the call option will be in-the-money, while the put option will expire worthless. The intrinsic value of the call option can be calculated as follows: $$ \text{Intrinsic Value of Call} = \text{Stock Price} – \text{Strike Price} = 120 – 100 = 20 $$ Since the put option is worthless at expiration, its value is $0. Therefore, the total value of the straddle at expiration is: $$ \text{Total Value of Straddle} = \text{Intrinsic Value of Call} + \text{Intrinsic Value of Put} = 20 + 0 = 20 $$ To find the profit from the straddle position, we subtract the initial cost of the straddle from the total value at expiration: $$ \text{Profit} = \text{Total Value of Straddle} – \text{Cost of Straddle} = 20 – 8 = 12 $$ Thus, the profit from the straddle position when the stock price increases to $120 is $12. This scenario illustrates the effectiveness of long volatility strategies, particularly in environments where significant price movements are anticipated. According to the Canadian Securities Administrators (CSA) guidelines, options supervisors must ensure that their strategies align with the risk tolerance and investment objectives of their clients. The use of straddles can be particularly beneficial in volatile markets, as they allow investors to capitalize on price swings without needing to predict the direction of the movement. Understanding the mechanics of options pricing, including intrinsic and extrinsic value, is crucial for effective options trading and risk management.

Firstly, an internal investigation allows the supervisor to gather comprehensive data regarding the trades in question, including timestamps, trade sizes, and the rationale behind each trade. This information is crucial for understanding whether the trades were indeed in violation of the firm’s policies or if there were mitigating circumstances that justified the trader’s actions. Secondly, the CSA emphasizes the importance of due diligence and thorough documentation in compliance matters. By conducting an internal investigation, the supervisor can ensure that all findings are well-documented, which is vital if the situation escalates to regulatory scrutiny. Furthermore, notifying the trader before conducting an investigation (option b) could lead to potential tampering with evidence or further violations, while reporting directly to regulatory authorities (option c) without a thorough internal review could reflect poorly on the firm’s compliance culture. Lastly, while implementing a temporary suspension (option d) may seem prudent, it should typically follow a comprehensive assessment of the situation to avoid unnecessary disruptions to trading operations. In summary, the correct initial action is to conduct an immediate internal investigation, as it aligns with the CSA’s guidelines on compliance and risk management, ensuring that the firm can respond appropriately to any violations while safeguarding its reputation and operational integrity.

In the context of Canadian securities regulations, particularly under the guidelines set forth by the Canadian Securities Administrators (CSA), it is crucial for investment advisors to ensure that their recommendations align with the client’s risk tolerance and investment objectives. The protective put strategy allows the client to set a predetermined exit point, thus providing a safety net against significant declines in the asset’s price. On the other hand, selling additional uncovered calls (option b) would expose the client to unlimited risk if the underlying asset’s price rises significantly, which contradicts the goal of risk mitigation. Buying more long calls (option c) increases exposure to upward price movements but does not address the downside risk, leaving the client vulnerable in a volatile market. Establishing a straddle position (option d) involves buying both a call and a put option at the same strike price, which can be costly and may not align with the client’s objective of maintaining some upside potential while hedging against downside risk. In summary, the protective put strategy is the most prudent choice for the client, as it effectively balances risk management with the opportunity for profit, adhering to the principles of prudent investment practices as outlined in Canadian securities law.

$$ CV = \frac{\sigma}{\mu} $$ where $\sigma$ is the standard deviation of the returns, and $\mu$ is the average return. In this scenario, the standard deviation ($\sigma$) is 15% or 0.15, and the average return ($\mu$) is 8% or 0.08. Plugging these values into the formula gives: $$ CV = \frac{0.15}{0.08} = 1.875 $$ This means that for every unit of return, the stock has a risk of 1.875 units, indicating a relatively high level of risk compared to its return. Understanding the CV is crucial for options supervisors and traders, as it allows them to compare the risk of different investments on a standardized basis. A higher CV indicates that the investment has a higher level of risk relative to its expected return, which is particularly important in the context of the Canadian securities regulations. The Canadian Securities Administrators (CSA) emphasize the importance of risk assessment in investment decisions, as outlined in the National Instrument 31-103, which requires firms to ensure that their clients understand the risks associated with their investments. In practice, a trader might use the CV to compare this stock with others in the same sector or with different asset classes. If another stock has a CV of 1.5, it would be considered less risky relative to its return than the stock in question. This nuanced understanding of volatility and risk is essential for making informed trading decisions and adhering to regulatory guidelines that prioritize investor protection and informed consent.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.

In this scenario, the investor buys a call option with a strike price of $55 for a premium of $3. At expiration, if the stock price rises to $65, the intrinsic value of the call option can be calculated as follows: 1. **Calculate the intrinsic value of the call option at expiration**: \[ \text{Intrinsic Value} = \max(0, \text{Stock Price} – \text{Strike Price}) = \max(0, 65 – 55) = 10 \] 2. **Calculate the total profit from the long call position**: The profit from the long call option is calculated by subtracting the premium paid from the intrinsic value: \[ \text{Profit} = \text{Intrinsic Value} – \text{Premium Paid} = 10 – 3 = 7 \] Thus, the investor’s profit from this long call position is $7. This scenario illustrates the importance of understanding the payoff structure of options, as outlined in the Canadian Securities Administrators (CSA) guidelines. The CSA emphasizes that investors must be aware of the risks and rewards associated with options trading, including the potential for total loss of the premium paid if the option expires worthless. Furthermore, the investor should also consider market conditions and volatility, as these factors can significantly impact the pricing and profitability of options. In summary, the correct answer is (a) $7, as it reflects the net profit after accounting for the premium paid for the call option. Understanding these calculations is crucial for any investor engaging in options trading, particularly in the context of Canadian securities regulations, which mandate that investors have a clear understanding of the products they are trading.